By looking at your financial statements, you may get a good idea of the absolute sales number over a period of time. To gain a deeper understanding of the financial health of your business, it is highly recommended that you track these Key Performing Indexes:
1. Gross Profit Margin tells you how efficient your business is in generating profit from the sale of your merchandise. Here is the formula:
Gross Profit Margin = ((Sales Revenue – Cost of Goods Sold)/Sales Revenue) x 100%
You are advised to track gross profit margin for the entire store, as well as for each product line. A high gross profit margin means your company is effective in controlling your costs and selling the goods at a healthy profit level. A low gross profit margin may indicate a poor pricing strategy or rooms for improvement in the operational efficiency of the business.
2. Net Profit Margin measures how much of your sales revenue is profit. It is the percentage of revenue left after cost of goods sold and other expenses have been deducted from the sales.
Net Profit Margin = ((Sales Revenue – Cost of Goods Sold – Total Expenses – Interest-Taxes)/ Sales Revenue) x 100%
The higher the net profit margin means the more profit is generated from a dollar of sales revenue. It also indicates the efficiency and effectiveness of a company’s operations. Therefore, if your net profit margin is lower than expected, then look for ways to reduce your expenses. Alternatively, increasing the price of your merchandise or enhancing your marketing efforts that bring in more sales could lead to a higher net profit margin.
3. Inventory Turnover measures the number of times inventory is sold over a given period.
Inventory Turnover Ratio = Cost of Goods Sold/((Beginning Inventory + Ending Inventory)/2)
A high turnover ratio is a sign of strong sales as your merchandise is selling fast. This also reminds you to replenish your stock as it may result in insufficient inventory. On the other hand, a low inventory turnover ratio is sending a message that the product may not be popular. Therefore, you may want to channel your marketing resources to promote it. Alternatively, you may want to discontinue the product and allocate your funds to the top-selling product.